Because my father spent his career in the Air Force, I have
had some interest in military history -- in the strategies for
winning and the strategies that resulted in defeat. In military
history, the First World War stands out because of the
extraordinary discrepancy that existed between the conditions of
warfare on the Western Front and the strategies and tactics that
dominated the minds of military decision makers. For the first
three years of the war, thinking on both sides emphasized attack
-- an artillery barrage, followed by the infantry moving in a
headlong assault with bayonets, followed by the cavalry.
Artillery, bayonets, cavalry -- the ABCs of warfare -- what could
be simpler? The problem was that -- by 1914 -- barbed wire,
machine guns and trenches had made this approach obsolete.
Officers, however, continued to believe that such an attack
would be successful if the morale of the attackers could be
brought to a sufficiently high pitch -- after all, it had worked
for Napoleon. Ideas have consequences -- and armies on both
sides suffered the largest military casualties in history as a
result of this approach. Despite millions of casualties, the
front -- extending from the English Channel on one extreme to
Switzerland on the other -- remained almost unchanged for more
than three years.

Neither military strategy nor bank supervision exists in a
vacuum. To be effective, both need to be shaped to current
conditions in the field. If we as bank supervisors have learned
anything in the last 15 years, it is that being out of touch with
current realities endangers the banking system and our own
credibility.

No one has repealed the business cycle -- we will continue
to experience good times and tough times in the economy.
Memories are short, and times are never so good that banks face
no problems -- incipient, developing, or full blown. The
critical issue in bank supervision is steering a moderate course
between the theoretical extreme where there are no problems and
the extreme where everything is a problem.

A moderate course is appropriate -- a course that recognizes
that when things are going badly, the pendulum has a way of
swinging back -- a course that recognizes that when things are
going well, the pendulum will swing the other way, too.
The moderate course is the course justified by critical
analysis and sound judgment. We bank regulators have one of the
few jobs in the world where we can be described as flat-footed
financial Keystone Kops one year and "regulators from hell" the
next. We avoid that kind of labeling only by always being
realists -- always being somewhat skeptical of conventional
wisdom and never being wholly optimistic nor solely pessimistic.
How do we steer such a moderate course?

First -- in the good times like those we are experiencing
now -- we need to develop our expertise and expand our knowledge.
We need to benchmark where banking is now -- and where it has
been previously -- to give us perspective on where it is going in
the future.

At the Federal Deposit Insurance Corporation, we are
addressing this need in a number of ways.

For example, we are enhancing our ability to leverage
existing statistical and analytical resources, both within and
outside the FDIC. All our agencies have generated a treasury of
data on the banking and thrift industries, including a data base
that the FDIC is developing on the causes of the large number of
failing and failed institutions in the 1980s and early 1990s. On
an ongoing basis, we are surveying our examiners on credit
underwriting practices and standards. We have created a Division
of Insurance to analyze risks to the insurance funds from a more
comprehensive perspective than we have done to date. This new
division will generate data and gather and synthesize analysis
from outside the FDIC -- information generated by analysts such
as yourselves. Our goal is to "bridge the gap" that currently
separates the "macro" perspective of economics and market trends
from the "micro" perspective of bank examinations in ways that
will translate information into guidance that examiners can use
in assessing and monitoring risks and evaluating internal
controls in institutions with different levels and types of risk
exposure. Put simply: We want the different parts of our agency
talking -- and working -- together.

Further, each of the agencies collects and analyzes data
from different perspectives. Regular efforts to compare trends
and pass those on to the three other supervisory agencies would
be helpful to all of us.

That brings me to the second element in steering a moderate
course during good times -- being alert to problems and doing
something about them before they result in damage to banks and
the banking system. In the late 1970s and early 1980s, examiners
in the Midwest witnessed a dangerous credit practice --
agricultural banks were lending without requiring well-defined
repayment programs and based upon inflated land values. Fueled
by export growth and rising commodity prices, U.S.agriculture in
the 1970s enjoyed a boom, which in turn caused the price of farm
land to rise significantly and prompted many farmers to borrow to
expand operations using inflated real estate values to support
increases in debt. The boom ended, land values declined, and
cash flow was insufficient to repay the debt. Agricultural
lenders, in turn, experienced large loan losses and agricultural
banks accounted for 32 percent of bank failures in 1984, 54
percent in 1985, 41 percent in 1986 and 30 percent in 1987.
Substitute the words "oil boom' for "agricultural boom" and
you have a similar story -- from 1980 through 1989, 535 banks
failed in Texas, Oklahoma, and Louisiana -- half of all U.S. bank
failures during the period. In Texas alone, 349 banks failed and
an additional 79 required FDIC financial assistance. Some of the
failures were of agricultural banks, but the majority succumbed
to problems related to energy. Substitute the words "real estate
boom" for "oil boom" and we begin moving from the late 1980s into
the nineties. From 1980 to 1990, real estate loans at banks rose
from 14.5 percent of assets to 24.5 percent of assets, with a
shift away from home mortgage lending to more volatile
construction and commercial lending, accompanied by a relaxation
in underwriting standards for construction and commercial real
estate.

All of this, of course, is an old story, and one burned into
the memories of many of us here today. I, too, have personal
memories of the crisis that visited U.S. banking in August, 1982,
when Mexico announced that it would be unable to meet its
principal payments to foreign creditors. That came after the
banks were actively encouraged by some U.S. policymakers in the
1970s to recycle petrodollars. The banks unfortunately concluded
that the fastest way to lend dollars was through balance of
payments financing without any clear source of repayment --
and with too much faith in optimistic expectations about the
economic and financial prospects of many developing countries.
By 1982, the non-trade exposure of the average U.S. money-center
bank to non-OPEC developing countries was 227 percent of equity
capital and reserves.

In the years 1980 through 1995 -- 1,626 Bank Insurance
Fund-insured institutions failed or received assistance
transactions. They held more than $304 billion in assets. Of
these institutions, 624 -- holding more than $165 billion in
assets -- were national banks. More than 927 of the institutions
-- holding more than $58 billion in assets -- were
state-chartered commercial banks. Savings banks -- state and
federal -- made up the remainder. The size of the average
failure was about $150 million in assets, but that average masks
two extremes. Of the failed institutions, 1,307 had assets of
less than $100 million, together holding $36 billion in assets.
The 42 institutions that exceeded $1 billion in assets together
held $193 billion in assets. These numbers do not include the
many banks -- some quite large -- that had near-death experiences
and survived only because some of you in this room helped nurse
them back to health.

My point in revisiting the past is a simple one: in
agriculture, oil, real estate and developing country lending,
inflated values and expectations provided a false sense of
security. In each case, we thought the crisis of the moment was
special -- there was a tendency not to draw from each experience
the broader implications about trends in bank lending -- of not
noticing -- until it was too late -- the general phenomenon
of overextended lending and weak capital. By the time those of
us working on these issues realized the individual crises were
linked by common forces that were pushing banks to exploit new
areas of lending beyond sustainable levels, the problems had
become cumulative.

Neither we nor the industry we supervise can afford being so
wrong again. The speed of technology and the rapid innovations
in the marketplace mean that trouble could come quickly and in
large numbers. We need to avoid being that wrong again by
monitoring trends more broadly and taking specific action on the
information we receive.

Several weeks ago, I was talking with a banker in Texas --
his institution, approximately $200 million in assets -- is
within an hour's drive of Dallas/Ft. Worth. I asked him how he
made it through the energy/real estate storm that blew through
Texas, and he replied: "The key thing was that, when things
looked so good, that's exactly when you should be worried. I was
involved with the state bankers association, so I heard stories
of things looking worse in certain parts of Texas -- a comment
here, a comment there. I took stock to see what was happening
elsewhere and to consider its relevance to us. I knew that we
were not smart enough or lucky enough to keep it from happening
to us -- if other folks were having problems, we would, too. I
saw problems elsewhere in real estate, and lowered our exposure
-- we hid behind a log for a while. If you wait until the cows
are out of the barn, it's too late. That's what helped us
through the eighties."

This banker survived by being alert to problems and by
taking preemptive action before problems grew. He survived
without our help. I believe others might have survived with our
help if they had been encouraged to take a broader perspective.
Our efforts to identify, measure and monitor risks in and to the
banking system will provide a basis for notices to banks on
trends that may affect the way they do business so that they can
respond to changing circumstances before problems arise. Such
notices can be purely economic -- the results of our modeling on
bank failures and other economic trends, analysis of connections
like rolling recessions of the kind in the 1980s and 1990s -- but
they can also discuss the effects of other types of events --
legislation, for example. Early and thorough analysis of the
difficulties thrifts would encounter as a result of the timing of
the elimination of interest rate restrictions -- and of the
effects of the sudden shift in the real estate investment climate
brought about by the Tax Reform Act of 1986 -- might have avoided
at least some of the trouble in the banking system over the last
fifteen years.

The third element in steering a moderate course in banking
supervision is to be just as realistic when the cycle turns down
as we are when the cycle is on the upswing -- that is to say,
while being alert to problems, we should not fall into the
mindset that problems lurk under every rock and in every loan
file -- not all technical violations of statute, regulations or
examination guidelines present safety and soundness problems.
One of my predecessors -- Bill Taylor -- used to say when
finishing an examination where the bank received the highest
supervisory rating: "We didn't find the problems this time, but
we'll be back." That approach may have made sense during a time
of crisis, but conditions now do not justify that approach.

Comptroller of the Currency Gene Ludwig illustrated that
mindset in a speech a number of years ago when he noted that one
of the OCC's examiners had criticized a bank for not having a
branch policy -- which was perfectly understandable under the
circumstances because the bank had no branches. A predisposition
to find fault -- a confrontational approach -- where it is not
warranted is just as incorrect as ignoring problems that are
there. It may also be just as destructive because it may cause a
negative reaction that could leave our safety and soundness
policies impaired by a legislative reaction.

At the FDIC, we have emphasized the need for clear
communication with bankers and the need to project a helpful
attitude when corrections are necessary. We also try to make
sure that minor matters do not get overemphasized. Like the rest
of you, we have increasingly emphasized the importance of
risk-focused examinations and of avoiding a checklist approach to
examinations.

Many people have perfect hindsight -- or at least claim to
-- but no one has perfect foresight. The agencies here must work
together to assure that we can better draw the distinction
between what we see as problems and what we do not see as
problems. In this exercise, different points of view enhance
perspective, but we need to make sure we come together after all
the issues are resolved to assure consistency in banking
supervision.

The fourth element in steering a moderate course is to stick
to basic principles of bank supervision both in good times and in
tough times. One such principle is that every bank needs to be
examined --on-site -- routinely and regularly. It is a mistake
to assume that smaller institutions are inherently less in need
of regular and routine on-site examinations simply because they
are small and not as complex. As I said earlier, 1,307 of the
1,626 BIF-insured institutions that failed from 1980 through 1995
had assets of less than $100 million. Small banks deserve our
supervision and guidance as much as large banks do. I have
talked with a number of bankers in smaller institutions who tell
me that they become uncomfortable if too much time lapses between
examinations.

Another basic principle of bank supervision is that care
should be given in chartering new banks. From 1980 through 1989,
there were 673 new commercial banks chartered in Texas -- 511
national banks and 162 state-chartered banks -- about a quarter
of all new banks chartered in that decade. Of those new Texas
charters, 142 -- close to one out of five -- failed by 1990.
Certainly, we cannot eliminate bank failures entirely -- any
attempt to do so would starve the economy of bank credit -- but
we can protect the banking system from unnecessary failures --
failures from problems that could have been avoided or addressed
before they threatened the viability of the institution.

Soon after Bill Taylor became Chairman of the FDIC, he
visited our New York regional office in connection with the
resolution of a savings institution. Bill -- being Bill --
wanted to check out some of the branch offices of the thrift to
see how business was going. He told Nick
Ketcha -- then head of our New York region -- to call for the car
and driver to take them around.

"Bill," Nick replied, "remember, this is the FDIC -- we
don't have a car and driver."

They took the subway instead.

When I visited our New York office for the first time, Nick
Ketcha also took me on the subway.

We may travel by varying paths, but as bank supervisors we
all should be going in the same direction. The accidents of
history created four different federal supervisors for two
closely related species of financial institutions. This
situation gives us the opportunity for inclusive diversity -- a
chance to share strengths. It also gives us the opportunity to
go separate ways.

Never has it been more important for us to work together
than today. Never has it been more critical for us to set one
consistent, sound, appropriate, reasonable and moderate course
for banking supervision than today.

We have to send clear signals to bankers and others who are
trying to accommodate their behavior to our direction.
Overlapping or conflicting signals will, at best, confuse them
and, at worst, may lead to behavior we do not want to see.

During the Crimean War, an event that was to be immortalized
in "The Charge of the Light Brigade" began with a confused
directive from officer to officer to "go for the guns." The
order was to the cavalry to retrieve a number of British cannon
aimed at Russian lines. Instead, the cavalry officers took the
order to mean that they should charge Russian artillery
positions. The result was a military disaster still remembered
150 years later.

Consistency results in clarity. When so many have so much
riding on us, we must be clear.

It is with great pleasure, therefore, that I welcome all of
you to this interagency meeting -- it has been several years
since we have come together in this way. I hope that this
meeting marks the resumption of annual meetings. Hosting this
meeting clearly emphasizes the importance that we at the FDIC
place on interagency cooperation and coordination.

Our discussions over the next two days will range from
designing a new breed of CAMEL to supervising banking in
cyberspace -- from the lessons of Daiwa to de novo applications
issues. The involvement of principals from all of the agencies
emphasizes the strong desire for consistency.

We are here today because we share a calling. It is not one
that receives great public applause, and it is not one for which
we receive great material reward. Our greatest compensation is
most often the respect and understanding of our peers. We know
that without the stability that we bring to an inconstant world,
Americans would suffer -- just as they suffered before our
regulatory system was created -- families often losing their
homes and children often losing the opportunity that higher
education provides. At the end of the day, we have the
satisfaction of knowing that what we do is important, that we
make a difference in people's lives. Government exists to serve
the public and what joins us all together is that we take that
service seriously.